Few families can afford to pay for college tuition and related costs without borrowing money. When looking for student loans, choose the loans with the most favorable terms so you will be able to pay them back with the least possible out-of-pocket expense. In general, subsidized student loans are significantly more advantageous than unsubsidized student loans.
General Definition
The federal government pays all interest on subsidized student loans while the student is in school, in the grace period or when the loan is deferred. Depending on the type of loan, the grace period is six to nine months after the borrower leaves school. Deferment occurs when the borrower enters school again, and the government also sometimes grants it to borrowers experiencing unemployment or severe economic hardship. Unsubsidized loans, on the other hand, always accrue interest that the borrower is responsible for paying. If desired, borrowers can delay payment of interest until they enter the normal repayment period.
Types of Subsidized Loans
Students apply for subsidized loans by filling out the Free Application for Federal Student Aid. The government only offers subsidized loans to some students and gives them on the basis of demonstrated financial need. The federal government offers two major types of subsidized loans. Subsidized Stafford loans for the 2011 to 2012 school year have an interest rate of 3.4 percent for undergraduates or 6.8 percent for graduate students. The amount students can borrow depends on their year in school. Subsidized Perkins loans allow students to borrow up to $5,500 per year as undergraduates or $8,000 per year as graduate students. The interest rate is fixed at 5 percent for all Perkins loans, as of 2011.
Types of Unsubsidized Loans
The federal government and private lenders offer unsubsidized loans that do not require students to have financial need. All students can borrow federal unsubsidized Stafford loans with a fixed interest rate of 6.8 percent. Graduate students can also take out federal PLUS loans at a fixed interest rate of 7.9 percent, as of 2011. As with subsidized loans, students apply for federal unsubsidized loans by filling out the FAFSA. Students can also apply for unsubsidized loans through private lenders. These lenders set their own interest rates, application processes and requirements for borrowers. Undergraduates often need to have an adult with good credit cosign on private student loans.
Considerations
If you get unsubsidized loans, the amount you owe will increase while you are in school because interest accrues on the money you borrowed. When your first loan payment becomes due, which is usually about six months after you drop below half-time enrollment due to withdrawal or graduation, the interest is capitalized. That means that it is added to the loan balance on which interest and payments are calculated in the future. Avoid increasing your loan balance by paying the interest before it is capitalized. You can do this by making payments during your grace period or by paying interest each month as it accrues.
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